ECON: Measuring Output and Income

circular flow model

Whether you use the income approach or the expenditures approach to calculating nominal GDP, you should arrive at the same number as shown in the circular flow model.

services

include haircuts, medical and legal services, education, and entertainment such as a live music concert. now constitute two-thirds of what households buy, because; as incomes have increased over time, people are more willing to pay others to do things for them.

Form of rent

land

One problem with developing countries is:

measures of GDP oftem underestimate the amount of production that actually occurs. Why? Developing countries often have relatively large informal markets.

Saving

occurs when households or firms take some of their income or profit and put it in a savings account, in the stock market, or in some other asset hoping to make a return on their money and spend it in the future.

Investment

occurs when you buy a house or expand a factory. much more volatile than real GDP as a whole. can be positive, negative, or zero.

final goods

only final goods and services are included in the GDP so that expenditures are not counted twice.

Only final goods and services are included in

the estimation of the dollar value of output produced in an economy, or nominal GDP.

form of labor

wages

When two countries specialize in producing the goods for which they have a comparative advantage

and trade with each other, total production and consumption increase.

Savings

are money in the bank or a stock or bond

form of capital

interest - in general, having more is desirable - wears out and needs to be replaced Example: We add $2 billion to the initial capital stock to determine next year's beginning capital stock: $100 + $12 = $102 billion.

Which of the following statements are true?

- exports generally exceeded imports before 1975 - after 1975, imports have exceeded exports.

Real GDP tells;

- how much output was produced in a country. - whether more was produced in one year relative to another.

GDP is not a perfect way to measure economic activity because:

- it ignores activities that occur outside formal markets. - goods and services that are not bought and sold in a market and are not included in GDP. - it does not account for the depletion of natural resources. - it cannot measure the value of leisure time. - it does not account for changes in product quality.

Which of the following are not included directly in the calculation of GDP?

-Used goods -Secondhand goods

Since the Great Recession, the U.S. Economy has experienced:

A significant decline in the labor force, could be because: - more workers went into the underground economy. - some people who lost jobs during the recession simply gave up looking for another job. - members of the Baby Boom generation are starting to retire.

consumption (C)

All expenditures made by households on goods and services like clothing, food, electronics, and recreation, during a given time period.

expenditures approach

An approach to calculating nominal GDP that sums four categories of expenditures on final goods and services in a country in a given time period, typically 1 year. The four categories of expenditure are consumption (C), gross investment (I), government purchases (G), and net exports (NX). The expenditures approach to calculating GDP tells us who bought what

When measuring GDP, we classify expenditures into which four categories?

Consumption, government purchases, net exports, gross investment We classify expenditures into four categories because; we like to know who is consuming what.

government purchases

Ex: a fighter jet, salaries of secret service agents, Salaries of government employees, such as police officers, teachers, and judges are included in nominal GDP within government purchases. Salaries in the private sector are not included in nominal GDP.

transfer payments

Ex: unemployment payments

imports (M)

Goods, services, or resources produced abroad and sold domestically.

exports (X)

Goods, services, or resources produced domestically and sold abroad.

GDP Price Index

Nominal GDP/Real GDP x 100 also called the GDP deflator can be used to track prices from year to year.

inflation

Real GDP measures the dollar value, adjusted for ___, of all final goods and services produced in a country during a fixed period of time.

depreciation

The consumption of physical capital, or the value of capital that wears out, is used up, or becomes obsolete during a year. in accounting, depreciation refers to a process that spreads the cost of an asset over a number of years. in economics, depreciation refers to capital that worn out or obsolete. equals the depreciation rate times the amount of capital. For year 1, this is 100 x 10% = 10

net imports (NX)

The difference between exports (goods made domestically and purchased by foreign consumers) and imports (goods made in other countries and purchased domestically). Net exports equals exports minus imports (NX = X - M)

net investment

The difference between gross investment and depreciation; represents the net change in the capital stock during a year. a good predictor of the future GDP if positive, then the total capital stock of a country is growing. Net Investment = I - Depreciation

gross investment (I)

The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a given time period. Gross investment is classified into three categories: business fixed investment, residential investment, and inventory investment. Sometimes referred to simply as investment.

intermediate good

an intermediate good or service is used to build or make another product that will be subsequently sold.

nominal gross domestic product (GDP)

a measure of GDP in which the quantities produced are valued at current-year prices; nominal GDP measures the current dollar value of production dollar value of all final goods and services that are produced during a fixed period of time. the sum of all expenditures in the economy; consumption, gross investment, government purchases, and net exports. national income + indirect business taxes + depreciation + net foreign interest income the expenditures or the dollar value of all the final goods and services that are produced during a fixed period of time two largest components of GDP are: - government purchases - consumption GDP excludes: - goods and services that are not bought and sold in a market. - activities that occur outside formal markets. - goods and services traded through barter. Nominal GDP = C + I + G + NX

government purchases (X)

all final goods purchased by federal, state, and local governments - such as tanks, police cars, fire engines, and office supplied - during a given time period, as well as all final services purchased from labor resources - such as airport security personnel, police officers, and teachers.

Imports

constitute about 1/6 of nominal GDP are not counted in nominal gdp because they were produced somewhere else.

Consumption includes

durable goods, non-durable goods, and services purchases made by consumers

underground economy

economic activity in which goods and servicesare exchanged for payment but are not counted as part of GDP. Markets that are part of the underground economy that exchange illegal goods and services or engage in illegal transactions are called black markets.

home production

goods and services that are produced by a household and are not exchanged in a market.

labor compensation

historically, labor compensation has been approximately 2/3 of total income.

more imports means

more competition from foreign firms.

real GDP

per capita is the same as real GDP per person. real GDP per Capita = real GDP/population. adjusts for inflation. RGDP uses current-year quantities and base-year prices. an imperfect measure of standard of living because it does not report the distribution of income. - it understated incomes in countries that have a lot of non-market transactions - it can mask disparities in the distribution of income prices constant to compare GDP from one time period to the next. using this provides us with a better picture of the economy because it: allows us to see what is happening to the amount of production over time without price changes skewing our calculation.

forms of entrepreneurial ability

profit

national income

rent + wages + interest + profits and losses. capital, entrepreneurial ability, labor, land.

investment

represents the accumulation of new capital refers to spending by firms on capital goods designed to improve the future productivity of the firm.

net exports (NX)

the difference between exports (goods made domestically and purchased by foreign consumers) and imports (goods made in other countries and purchased domestically). Net exports equals exports minus imports. (NX = X - M) When calculating net exports, exports are added to GDP, whereas imports are subtracted from GDP. Net exports are positive when exports exceed imports. NX = X - M Net Exports = Export - Imports

gross investment

the dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a given time period. Gross investment is classified into three categories: business fixed investment, residential investment, and inventory investment. Sometimes referred to simply as investment. tells how much capital is being created. investment occurs when firms invest in new buildings or replacement machines, adding to the capital stock that will allow the economy to produce more in the future.

income approach

the income approach to calculating GDP tells us who earned what. the income approach to measuring GDP measures the total value of all final goods and services in an economy based on the income they generate.

The more capital that is available to its workers

the more productive a nation will be.

consumption

the sum of durable goods, nondurable goods, and services. Consumption = Durable Goods + Nondurable Goods + Services